Solutions to the problems in Introduction to

Dynamic Macroeconomic Theory

July 10, 2008
EXERCISES
1.1 C(t) = N + (1
) N = N for all t > 1 therefore, it is feasible.
1.2 C(t) = N (t) + N (t 1)n(1
) = N (t) + N (t)(1
) = N (t)
for all t > 1 therefore, it is feasible.
1.3 C(t) = 2 = Y (t) for all t > 1 therefore, it is feasible.
1.4 C(t) = 1 = Y (t) for all t > 1 therefore, it is feasible.
1.5 If C(t) < Y (t) for some t > 1, there is an alternative feasible allocation
with more total consumption of some good and no less of any other good C(t) =
Y (t) for all t > 1:
1.6 A [0:5 ; 0:5 ] allocation is Pareto superior to the [0:6 ; 0:4 ] allocation,
but is noncomparable to a [0:4 ; 0:6 ] allocation.
1.7 If an allocation is Pareto optimal, then C(t) = Y (t) for all t > 1:
1.8 The allocation determined by = 0:5 is Pareto superior, ch0 (1) = 0:5 ;
u(0:5 ; 0:5 ) = 1:41 1=2 ; ch0 (1) = 0:25 ; u(0:75 ; 0:25 ) = 1:36 1=2 All members of all generations are better o.
1.9 The allocation determined by = 0:1 is Pareto superior, ch0 (1) = 3:6 ;
u(0:1 ; 3:6 ) = 2:21 1=2 ; ch0 (1) = 2 ; u(0:5 ; 2 ) = 2:12 1=2 :
1.10 The allocation ch0 (1) = 1=2 for h = 1; 2 ; cht (t) = cht (t + 1) = 1=2 for
h = 1; 2 for all t > 1 is Pareto superior.
1.11 See page 26.
1.12 uht = cht (t)cht (t + 1) t > 1; h = 1; 2; Y (t) = 16; cht = [6; 2] h = 1; 2
This allocation is e cient and the MRS are equal. But, the e cient allocation
cht = [2; 6] is Pareto superior.
1.13 If < 1=4 all members of all generations t > 1 are worse o. If > 1=4
the old at period 1 are worse o.
1.14 0 < 6 0:5:
1
:
1.15 0 < 6
1+n
[ch (t + 1)]1=2
= t h 1=2
@uh
t
[ct (t)]
@ch
t (t+1)
fr(t)[! ht (t) cht (t)] + ! ht (t + 1)g1=2
[cht (t)]1=2

2.1 r(t) =
=

@uh
t
@ch
t (t)

! ht (t)
! ht (t + 1)
+
:
2
1 + r(t) r(t)[1 + 2 r(t)]
2
r(t)! ht (t)
! ht (t + 1)
2.2 sht (r(t)) =
:
2
1 + r(t)
r(t)[1 + 2 r(t)]
50
2.3 a. St (r(t)) = 100
r(t)
50
b. St (r(t)) = 75
:
r(t)
2.4 a. r(t) = 1=2 for all t > 1; sht (t) = 0; ch0 (1) = 1; cht = [2; 1]:
b. r(t) = 2 for all t > 1; sht (t) = 0; ch0 (1) = 2; cht = [1; 2]:
c. r(t) = (1=2)1=2 for all t > 1; sht (t) = 0; ch0 (1) = 1; cht = [2; 1]:
d. r(t) = 2=3 for all t > 1; seven
(t) = 1=4; sodd
1=4; ceven
(1) = 1;
t
t (t) =
0
even
odd
odd
ct
= [7=4; 7=6]; c0 (1) = 1; ct = [5=4; 5=6]:
e. r(t) = 5=8 for all t > 1; sht (t) = 1=5; ch0 (1) = 1; cht = [9=5; 9=8] h =
1; 2; ::::; 60; sht (t) = 3=10; ch0 (1) = 1; cht = [13=10; 13=16] h = 61; 62; ::::; 100:
f. r(t) = 1 t = 1; 3; ::::; sht (t) = 0; ch0 (1) = 1; cht = [1; 1]; r(t) = 1=2
t = 2; 4; ::::; sht (t) = 0; ch0 (1) = 1; cht = [2; 1]:
2.5 2.4a. cht = [1; 2] is Pareto superior. All members of all generations
t > 1 have the same utility level, but the old at period 1 are better o.
2.4c. cht = [1; 2] is Pareto superior.
= [5=6; 5=4] is Pareto superior.
= [7=6; 7=4]; codd
2.4d. ceven
t
t
h
2.4e. ct = [9=8; 9=5] h = 1; 2; ::::; 60 ; cht = [13=16; 13=10] h =
61; 62; ::::; 100 is Pareto superior.
[0:8; 1:25] t = 1; 3; :::
is Pareto superior.
2.4f. cht =
[1:75; 1:2] t = 2; 4; :::
3.1 a. r(t) = 2 for all t > 1; sht (t) = 0; ch0 (1) = 2; cht = [1; 2] is Pareto
superior to that obtained in the absence of the scheme. All members of all
generations t > 1 have the same utility level, but the old at period 1 are better
o .
1=4; ceven
(1) = 2;
(t) = 1=4; sodd
b. r(t) = 4 for all t > 1; seven
t (t) =
t
0
odd
odd
even
= [3=4; 3]; c0 (1) = 2; ct = [1=4; 1] is noncomparable to that obtained
ct
in the absence of the scheme.
c. The maximum that can be given to every person when old is 2.
r(t) = 3 for all t > 1; sht (t) = 0; ch0 (1) = 3; cht = [1; 3] is Parteo
superior to that obtained in the absence of the scheme.
d. Each person when young is taxed 1 unit and that is transfered to the
old.
r(t) = 3 for all 1 < t < 10; sht (t) = 0; ch0 (1) = 3; cht = [1; 3]
r(t) = 2 for all t > 10; sht (t) = 0; cht = [1; 2]
It is Parteo superior to that obtained in the absence of the scheme.
ch (t + 1)
! ht (t + 1)
h
3.2 ct (t) + t
= g ! ht (t) +
Equivalent : Changes
(1 z )r(t)
(1 z )r(t)
in income and consumption taxes that left g constant did not change the equilibrium pattern of consumption.
3.3 a. r(1) = 8=3; sh1 (1) = 0; ch0 (1) = 2:25; ch1 = [3=4; 2]:
then, cht (t) =

b. r(1) = 8=3; sh1 (1) = 1=4; ch0 (1) = 2:25; ch1 = [3=4; 2]:
c. r(1) = 4; sh1 (1) = 1=4; ch0 (1) = 2:25; ch1 = [3=4; 3].
50
= 25; r(1) = 2=3; sh1 (1) = 1=4; ch1 = [7=4; 7=6];
3.4 S1 (r(1)) = 100
r(1)
50
S2 (r(2)) = 100
= 16:67; r(2) = 0:6; sh2 (2) = 0:167; ch2 = [1:83; 1:1] is
r(2)
Pareto superior. It is not Pareto optimal, because all generations are worse o
than if the government borrowed 50 units and rolled that borrowing over.
3.5 2.4b. It is not a feasible rolling over policy.
50
2.4d. St (r(t)) = 75
= 25; r(t) = 1 for all t > 1; seven
(t) = 1=2;
t
r(t)
odd
even
odd
st (t) = 0; ct
= [1:5; 1:5]; ct = [1; 1]:
3.6 r(t) = 1:5; ch1 = [4=3; 2]:
3.7 th1 (1) = 0:28125; th1 (2) = 0:3:
4.1 = 1:2; bh (0) = 0:17; = 0:8; bh (0) = 0:
4.2 The preferred consumption point changes. a. " ch0 (1); # ch1 (1) b. # ch0 (1);
h
" c1 (1):
4.3 uh1 [ch1 (1); ch1 (2); uh0 (ch0 (1))]; ch0 (1) = ! h0 (1)+bh (1) th0 (1); ch1 (1) = ! h1 (1)
h
b (1) th1 (1); ch1 (2) = ! h1 (2): Each member h of generation 1 chooses a bequest,
bh (1), that maximizes the utility function subject to the budget constraints.
2r(1) 1 even
3r(1) 1
4.4 bodd (0) =
;b
(0) =
:
3r(1)
3r(1)
4.5 r(1) = 0:57:
4.6

bh (t) = 0
5.1 lh (t) = ! ht (t) cht (t) pk (t)bhk (t); cht (t + 1) = ! ht (t + 1) + r(t)[! ht (t)
h
h
h
h
h
h
ct (t) pk (t)bhk (t)] + ph;e
k 1 (t + 1)bk (t); r(t)ct (t) + ct (t + 1) = r(t)! t (t) + ! t (t +
1) bhk (t)[r(t)pk (t) ph;e
k 1 (t + 1)]:
5.2 If r(t)pk (t) > pek 1 (t + 1)
bhk (t) = 0 for all h of generation t. If
e
h
r(t)pk (t) < pk 1 (t + 1) bk (t) = 1 for all h of generation t: Neither of these
cases can be an equilibrium.
5.3 r(t) = 1:5; pk (t) = 0:67; sht (t) = 0:67; cht = [1:33; 2]:
5.4 r(t) = 1; pk (t) = 0:5; sht (t) = 0:5; cht = [1:5; 1:5]:

+ 1))4 + 8(1 + pek 1 (t + 1))pek 1 (t + 1)]1=2

:
2(1 + pek 1 (t + 1))
5.6 r(1) = 0:83; r(2) = 0:75; p2 (1) = 1:6; p1 (2) = 1:33; p0 (3) = 1; ch0 (1) =
1:4; ch1 = [1:6; 1:33]; ch2 = [1:66; 1:25]; ch3 = [1:75; 1]; sh1 (1) = 0:4; sh2 (2) = 0:33;
sht (t) = 0 for all t > 3:
5.7 r(1) = 0:9; r(2) = 0:625; p2 (1) = 1:78; p1 (2) = 1:6; ch0 (1) = 1:44;
h
c1 = [1:56; 1:4]; ch2 = [1:6; 1]; cht = [2; 1] for all t > 3:; sh1 (1) = 0:44; sh2 (2) = 0:4:
If the borrowing and taxing scheme shifts the tax burden to other generations,
then the concept of Ricardian equivalence does not hold. Passing on taxes to
other generations does change the consumption pattern and the gross interest
rate that occurs in the economy.
5.8 r(1) = 0:67; r(2) = 0:6; p2 (1) = 2:5; p1 (2) = 1:67; ch0 (1) = 1:25; ch1 =
[1:75; 1:17]; ch2 = [1:83; 1:1]; ch3 = [1:9; 1]; sh1 (1) = 0:25; sh2 (2) = 0:17; sht (t) = 0
for all t > 3:
5.9 a. Under perfect foresight hypothesis pek 1 (t + 1)=pk 1 (t + 1)
1
1
p0 (t + k)
=
; p1 (t + k 1) =
r(t + k 1) =
p1 (t + k 1)
p1 (t + k 1)
r(t + k 1)
p1 (t + k 1)
1
r(t + k 2) =
=
; p2 (t + k 2)
p2 (t + k 2)
p2 (t + k 2)r(t + k 1)
1
1
=
...... pk (t) =
;
r(t + k 2)r(t + k 1)
r(t)r(t + 1):::::r(t + k 2)r(t + k 1)
1=k
1
rk (t) =
= (r(t)r(t + 1):::::r(t + k 2)r(t + k 1))1=k
pk (t)
5.5 pk (t) =

(pek

1 (t

+ 1))2 + [(pek

1 (t

b. If perfect foresight is not assumed, pek 1 (t + 1) 6= pk 1 (t + 1), and the

above relationship need not hold.
5.10 r(t + 1) = 8:05. This test imply that our perfect foresight version of
the expectations hypothesis of the term structure of interest rates has failed.
5.11 r(1) = 0:67; r(2) = 0:6; p1 (1) = 1:5; p2 (2) = 1:67; ch0 (1) = 1:25;
h
c1 = [1:75; 1:17]; ch2 = [1:83; 1:1]; ch3 = [1:9; 1]; sh1 (1) = 0:25; sh2 (2) = 0:17;
sht (t) = 0 for all t > 3:
5.12 Hint page 141.
6.1 cht (t) = ! ht (t) lh (t) p(t)ah (t) + ah (t)d(t); cht (t + 1)
= ! ht (t + 1) + r(t)lh (t) + ah (t)ph;e (t + 1):
6.2 lh (t) = ! ht (t) cht (t) p(t)ah (t); cht (t + 1)
= ! ht (t + 1) + r(t)[! ht (t) cht (t) p(t)ah (t)] + ah (t)d(t + 1) + ah (t)ph;e (t + 1);
r(t)cht (t)+cht (t+1) = r(t)! ht (t)+! ht (t+1) ah (t)[r(t)p(t) d(t+1) ph;e (t+1)]:
6.3 If r(t)p(t) > d(t + 1) + pe (t + 1) ah (t) = 0 for all h of generation t:
If r(t)p(t) < d(t + 1) + pe (t + 1) ah (t) = 1 for all h of generation t: Neither
of these cases can be an equilibrium.
6.4 a. r(t) = 2:5; p(t) = 0:8; sht (t) = 0:8 for all t > 1:
b. r(t) = 2; p(t) = 0:75; sht (t) = 0:75 for all t > 1:
c. r(t) = 3; p(t) = 0:83 if t is odd; r(t) = 2; p(t) = 0:75 if t is even.
d. r(t) = 3:33; p(t) = 0:6 for all t > 1:
e. r(t) = 2:5; p(t) = 0:8 if t is odd; r(t) = 5; p(t) = 0:4 if t is even.

50p(t)
50p(t)
= p(t)100; 2. 75
= p(t)100;
1 + p(t + 1)
1 + p(t + 1)
p(t)
= p(t)100; N (t) = (1:1)t 1 100:
3. N (t) 1
2 + 2p(t + 1)
p(t)(200 + N (t)) 2N (t)
p(t)150 75
; 3. p(t + 1) =
;
6.6 2. p(t + 1) =
75 p(t)100
2N (t) p(t)200
t 1
N (t) = (1:1) 100:
6.7 p(t) = 0:569; r(t) = 2:76 for all t > 1:
6.8 p(t) = 0:707; r(t) = 1:707 for all t > 1:
p
p
6.9 a. p(t) = p; time t 100 1
= 100p; time t +1 110 1
=
2 + 2p
2 + 2p
p(1)
100p, this can not be an equilibrium. b. p(t+1) = 1:1p(t); time 1 100 1
2 + 2:2p(1)
1:1p(1)
100p(1); time 2 110 1
= 100p(1)1:1, this can not be an equi2 + 2:42p(1)
librium.
(1 2d) ((1 2d)2 + 16d)1=2
; as d goes to 0, p goes toward
6.10 p =
4
0.5.
ch (t + 1)
6.11 cht (t) + t
(1 z )r(t)
! ht (t + 1)
ah (t)
(1 z ) h
(r(t)p(t) d(t + 1) p(t + 1)) ;
! t (t) +
=
(1 + zc )
(1 z )r(t) (1 z )r(t)
ch (t + 1)
! ht (t + 1)
cht (t)+ t
= g ! ht (t) +
: All nonnegative pairs (zc ; z )
(1 z )r(t)
(1 z )r(t)
(1 z )
satisfying
= g for a given, constant g satisfying 0 < g < 1 are equiv(1 + zc )
alent.
6.12 cht (t) = ! ht (t) lh (t) p(t)ah (t); cht (t + 1)
)] + ah (t)p(t + 1);
= ! ht (t + 1) + r(t)lh (t) + ah (t)[d(t + 1)(1
d(t + 1)(1
) + p(t + 1)
r(t) =
:
p(t)
This tax aects the return and the price of the land.
hV
6.13 PA. pV (t) = 0:78; rV (t) = 2:28; chV
= [1:22; 2:78];
0 (1) = 2:78; ct
hW
hV
W
W
hW
ut = 3:39: p (t) = 0:425; r (t) = 3:35; c0 (1) = 3:85; ct = [1:15; 3:85];
uhW
= 4:43:
t
LF. p(t) = 0:549; r(t) = 2:82; cht = [1:18; 3:31]; uht = 3:9:
People from country W is better o under PA. People from country V is
better o under LF.
6.14 p(t) = 0:549; r(t) = 2:82; cht = [1:18; 3:31] for t > 2; pV (1) = 0:756;
V
hV
= [1:24; 2:55]; pW (1) = 0:43; rW (1) = 3:6;
r (1) = 2:05; chV
0 (1) = 2:756; c1
hW
hW
c0 (1) = 3:86; c1 = [1:14; 4:1]:
3 + 2p(t + 1)
1 + 2p(t + 1)
7.1 p(t) =
for t odd; p(t) =
for t even.
4 + 2p(t + 1)
2 + 2p(t + 1)
4 + 5p(t + 2)
7.2 p(t) =
:
5 + 6p(t + 2)
6.5 1. 100

0:39 for t odd

4:46 for t odd
r(t) =
ch = [0:61; 2:73];
0:74 for t even
1:88 for t even odd
cheven = [1:27; 2:38]:
1=2 for t odd
0:8165 for t odd
7.4 If d(t) =
p(t) =
3=2 for t even
0:7247 for t even
If d(t) = 1=2 for all t; p(t) = 0:707 for all t: If d(t) = 3=2 for all
t; p(t) = 0:823 for all t:
a1 p(t)
7.5 S(r(t)) = p(t)A; a0
= p(t)A;
d(t + 1) + p(t)
(a0 Ad(t + 1) a1 ) ((a0 Ad(t + 1) a1 )2 + 4Aa0 d(t + 1))1=2
p(t) =
2A
7.6 p(t) = 0:8 for all t; r(t) = 1; sht (t) = 0:8; cht = [1:2; 1:8]; uht = 0:8:
0:3686 for t odd r(t) = 2:62; sht (t) = 0:37; cht = [1:63; 1:97]; uht = 0:14
p(t) =
0:9648 for t even r(t) = 0:38; sht (t) = 0:96; cht = [1:04; 1:36]; uht = 2:56
7.3 p(t) =

8
< 0:4784 for t = 1; 4; :::; r(t) = 0:13; sht (t) = 0:49; cht = [1:51; 1:06]; uht = 3:77
0:0611 for t = 2; 5; :::; r(t) = 16:35; sht (t) = 0:06; cht = [1:94; 1:99]; uht = 0:004
p(t) =
:
0:9991 for t = 3; 6; :::; r(t) = 0:48; sht (t) = 1; cht = [1; 1:48]; uht = 2:08
0:264 for t odd
7.7 p(t) = [5p(t + 1) 5(p(t + 1))2 ]1=2 ; p(t) =
0:986 for t even
8
< 0:2763 for t = 1; 4; ::
0:7262 for t = 2; 5; ::
p(t) =
:
0:9999 for t = 3; 6; ::
7.8

7.9 d(t) = 0:167:

8.1 a. ch0 (1) = 0:5; cht = [0:5; 0:5] for all t > 1; uht = 0:25 (C(t) = 1 = Y (t)
for all t > 1)
6

b. ch0 (1) = 0:5; cht = [0:3; 0:9] for all t > 1; uht = 0:27
Consumption allocation b is Pareto superior.
8.2 There is another allocation that gives person h greater utility and gives
everyone else the same utility level. See chapter 1.
8.3 If r(t) <
lh (t) ! 1; k h (t + 1) ! 1 and this is not feasible.
Therefore it can not be an equilibrium.
8.4 St (r(t)) = K(t + 1) = 0; fr(t); K(t)g = fr; 0g for all t > 1:
8.5 S( ) = K > 0; fr(t); K(t)g = f ; Kg for all t > 1:
p(t + 1) + d(t + 1)
; r(t) > ; K(t + 1) = 0 for
8.6 St (r(t)) = p(t)A; p(t) =
r(t)
all t > 1:
p(t + 1) + d(t + 1)
; r(t) =
for all
8.7 St ( ) = p(t)A + K(t + 1); p(t) =
r(t)
t > 1:
ch (t + 1)
! h (t + 1)
8.8 a. cht (t) + t
= (1 z! ) ! ht (t) + t
r(t)
r(t)
d(t
+
1)
+
p(t
+
1)
ah (t) p(t)
k h (t + 1) 1
r(t)
r(t)
h
h
c (t + 1)
! (t + 1)
b. cht (t) + t
= ! ht (t) + t
r(t)
r(t)
(1 zd )d(t + 1) + p(t + 1)
h
a (t) p(t)
k h (t + 1) 1
:
r(t)
r(t)
A tax on land rents aects r(t):
8.9 See page 222
4
9.1 Y (t) = 66:24; Y 0 (t) = 88:32; Y 0 (t) = Y (t):
3
9.2 wage(t) = wage0 (t) = 4:42; rental(t) = rental0 (t) = 1:77:
wage(t)L(t) = 39:8; wage(t)L0 (t) = 53; rental(t)K(t) = 26:6; rental(t)K 0 (t) =
35:4:
4:52
9.3 sht (r(t)) = 4:71
:
r(t)
9.4 K = 694; Y = 5784; ch = [19:1; 31:7]:
9.5 K(t + 1) = 50:68K(t)0:4 ; Y (t) = 422:34K(t)0:4 :
9.6 K(t + 1) = (1:05)t 50:68K(t)0:4 ; Y (t) = (1:05)t 422:34K(t)0:4 :
10.1 N (t) = 100; A = 100; ! ht = [2; 1]; d(t + 1) = 0; uht = (cht (t) b )2
h
(ct (t + 1) bo )2 ; where = 4 and b = [b ; bo ] = [2; 2]:
10.2 pm (t) = 0:25 stationary monetary equilibrium; cht = [1:5; 1:5]; ch0 (1) =
1:5: pm (t) = 0 stationary nonmonetary equilibrium; cht = [2; 1]; ch0 (1) = 1: If
pm (t) is between 0.25 and 0 for any t, then a nonstationary equilibrium that is
consistent with that pm (t) is a series of prices that converge to a price of 0.
p0 (t + 1) + d(t + 1)
10.3 If pm (t) = pm (t + 1); r(t) = 1;
= 1; p0 (t) = p0 (t +
p0 (t)
1) + d(t + 1): For each p(1); there is one n for which p(n) < 0: This can not be
an equilibrium.

pm (t + 1)
and r(t) > : If r(t) > > 1 no monetary equilibrium
pm (t)
exist. If r(t) > < 1 a monetary equilibrium exist.
10.5 The return on money in a monetary equilibrium is r(t) = n > ; then
k h (t + 1) = 0:There is a monetary equilibrium.
10.6 uht = 2:25; ch0 (1) = 1:5 stationary monetary equilibrium.
2 < uht < 2:25; 1 < ch0 (1) < 1:5 nonstationary monetary equilibrium.
10.7 uht = 2:25; ch0 (1) = 1:25 h = 1; ::::; 50 stationary monetary equilibrium
uht = 1; ch0 (1) = 1:25 h = 51; ::::; 100
uht < 2:25; ch0 (1) < 1:25 h = 1; ::::; 50 nonstationary monetary
equilibrium
uht < 1; ch0 (1) < 1:25 h = 51; ::::; 100
10.4 r(t) =

10.8 r(t) =

@uh
t
@ch
t (t)

@uh
t
@ch
t (t+1)

r(t)[! ht (t)
cht (t) =

cht (t + 1)
cht (t)

cht (t)] + ! ht (t + 1) +
! ht (t)

cht (t)
+ ! ht (t + 1) +

pm (t+1)(
1)M (t)
N (t)

pm (t + 1)(
1)M (t)
N (t)

2
sht (t) = ! ht (t) cht (t)
! h (t)
pm (t + 1)(
1)M (t)
= t
! ht (t + 1) +
2
N (t)
10.9 See page 282.
200 100( ) 1
1
10.10 g = 1
:
1+( ) 2
1
10.11 g = 1
(50 100 ):

1
2r(t)

1
2r(t)

10.12 See page 285.

10.13 See gure 10.4. A lump-sum tax can raise the same revenue as point
c2 but with higher utility.
10.14 Use the same graph as in exercise 10.13.
11.1a. E = 2; pA (t) = 0:19; pB (t) = 0:38; chi
t = [1:5; 1:5] i equals A and B.
b. E = 4; pA (t) = 0:125; pB (t) = 0:5; chi
t = [1:5; 1:5] i equals A and B.
11.2 M A (1) = 234; M A (2) = 271; M A (3) = 314; M A (4) = 361; M A (5) =
414: M B (1) = 108; M B (2) = 118; M B (3) = 129; M B (4) = 141; M B (5) = 154:
11.3 M A (1) = 220; M A (2) = 242; M A (3) = 269; M A (4) = 299; M A (5) =
332: M B (1) = 115; M B (2) = 132; M B (3) = 152; M B (4) = 173; M B (5) = 197:
11.4 E(1) = 0:9; E(2) = 0:84; E(3) = 0:79; E(4) = 0:75:
12.1 a. ! ht = [1; 2]; sht (2; 0:4) = 0; sht (1; 0:4) = 0:4; sht (0:5; 0:4) = 0:4;
sht (2; 0:2) = 0; sht (1; 0:2) = 0:2; sht (0:5; 0:2) = 0:2: b. ! ht = [2; 1]; sht (2; 0:4) =
0:75; sht (1; 0:4) = 0:5; sht (0:5; 0:4) = 0; sht (2; 0:2) = 0:75; sht (1; 0:2) = 0:5;
sht (0:5; 0:2) = 0:
12.2 a. x = 0; p(t) = 0:017; uht = 2:25; ch0 (1) = 1:17 h = 1; ::; 20; uht = 2:25;
h
c0 (1) = 2:17 h = 21; ::; 30:

b. x = 0:4; p(t) = 0:02; uht = 2:25; ch0 (1) = 1:2 h = 1; ::; 20; uht = 2:24;
= 2:2 h = 21; ::; 30:
12.3 a. x = 0; g = 0; uht = 2:11; ch0 (1) = 1 h = 1; ::; 20; uht = 2:45; ch0 (1) = 2
h = 21; ::; 30:
b. x = 0:4; g = 0:7; uht = 2:11; ch0 (1) = 1:093 h = 1; ::; 20; uht = 2:35;
h
c0 (1) = 2:093 h = 21; ::; 30:
i
1 h
1
4 ; gx(t)=0:2 =
(25 20 ); gx(t)=0:4 = 1
20 1
12.4 g = 1
2
i
1 h
1
2 :
20 1
2
12.5 rm = 1; rL = 1:5; ra = 1:33; p(t) = 0:155:
12.6 rm = 1; rL = 2; ra = 1:67; p(t) = 0:14:
12.7 a. rm = 1; rL = 1:5; ra = 1:33; p(t) = 0:12; ceven
= [1:88; 2:49];
t
odd
= 2:04: b. rL = 1; p(t) = 0:0625;
= 4:68; uodd
ct = [1:16; 1:76]; ueven
t
t
ceven
= [2; 2]; codd
= [1:5; 1:5]; ueven
= 4; uodd
= 2:25:
t
t
t
t
12.8 rm = 1; rL = 1:5; ra = 1:33; p(t) = 0:112:
12.9 The marginal rates of substitucion are dierent. We can reallocate the
resources and nd a feasible allocation where the marginal rates of substitucion
are the same. This allocation is Pareto superior.
12.10 Use graph page 281.
12.11 Use result of exercise 12.10 plus denition of Pareto superior.
12.12 All symmetric allocations where the government gets g units of the
consumption good fall on the 45-degree line in gure 12.15. Use denition of
Pareto superior.
12.13 If n = N and F = ! t (t) ct (t); everyone consume at point c :
g
g
! t (t) + ! t (t + 1)
! t (t) ! t (t + 1) +
n ; s (t) =
n:
12.14 ct (t) =
t
2
2
Yes, this is the F for the c consumption, when g = 0:
ch0 (1)